1. Senior management has been very concerned about the recent cash flow situation for the firm. You have been asked to identify specific issues that may have adversely impacted the free cash flow in 2020. You should use an appropriate analytical framework and numerical values to demonstrate the problems. Please note there may be more than one area of concern. You should propose a solution going forward to address each of the specific issues.
2. In addition to concerns regarding the free cash flow, senior management is concerned about the firm's ROE for 2020. In particular, they are not sure recent activities by the firm have been value enhancing. Using the data provided, evaluate the ROE and each of its components to determine if management's concerns are justified. You should make very specific suggestions for improving ROE if needed. As part of your proposal, demonstrate how these improvements can be measured using specific metrics.
3. In their efforts to grow the ROE of the firm, the management has become aware of the potential influence of other "qualitative" or "nonfinancial" issues that could place the firm and its ROE at risk. These issues include: 70% of the sales revenue is from one customer; approximately 80% of the firm's essential rea materials come from a single supplier. Furthermore, the labor force at the firm's main facilities has recently unionized. Additionally, management is concerned about the impact of rising inflation and the U.S. Federal Reserve raising interest rates to slow consumer spending. You have been asked to prepare a brief outline of these issues and explain how each of them could impact firm's ability to maintain or improve the firm's financial performance measured by ROE. Your analysis must demonstrate how these issues might impact the specific components of ROE.
4. Given you analysis of the firm's performance results for the questions above (1-3), provide a brief explanation of the potential impact of these issues on the cost of borrowing for the firm based upon its yield to maturity for its existing bonds. You should use a "general analytical framework" for the yield to maturity or cost of debt funding to address this question. Note: You may wish to use specific numbers to describe specific effects or points of impact. The firm's current cost of debt is 10.5% pre-tax.
5. Given you analysis, did the recent growth in this firm create value for shareholders? If so, how much? Provide very specific metrics for this year and looking forward. Provide clear explanation of your results. You should assume a cost of capital of 10.25% for the firm.
B A C 26 MicroDrive Inc. December 31 Balance Sheets 27 (Millions of Dollars) 28 Assets 29 Cash and equivalents 30 Short-term investments 31 Accounts receivable 32 Inventories 33 34 Net property, plant, and equipment (PP&E) 35 Total assets Total current assets 36 37 Liabilities and Equity 38 Accounts payable 39 Notes payable 40 Accruals 41 42 Long-term bonds 43 Total liabilities 44 Preferred stock (1,000,000 shares) 45 Common stock (60,000,000 shares) 46 Retained earnings 47 Total common equity 48 Total liabilities and equity 49 Total current liabilities F 2019 $100 10 500 1,000 $1,610 2,000 $3,610 $200 150 400 $750 520 $1,270 100 500 1,740 $2,240 $3,610 G 2018 $102 40 384 774 $1,300 1,780 $3,080 $180 28 370 $578 350 $928 100 500 1,552 $2,052 $3,080 A B 56 57 Net sales 58 Costs of goods sold except depreciation 59 Depreciation and amortization" 60 Other operating expenses 61 Earnings before interest and taxes (EBIT) 62 Less interest 63 64 Taxes 65 66 Preferred dividends 67 Net Income available to common stockholders 68 Pre-tax earnings D Net Income before preferred dividends 69 Additional Information 70 Common dividends 71 Addition to retained earnings 72 Number of common shares 73 Stock price per share 74 75 Per Share Data 76 Earnings per share, EPS 77 Dividends per share, DPS 78 Book value per share, BVPSd E F 2019 $5,000 3,900 200 500 $400 60 $340 85 $255 7 $248 $60.0 $188.0 60 $31.00 $4.13 $1.00 $37.33 G 2018 $4,800 3,710 180 470 $440 40 $400 100 $300 7 $293 $59.4 $233.6 60 $45.00 $4.88 $0.99 $34.20 A B 118 Operating Activities 119 Net Income before preferred dividends 120 Noncash adjustments 121 C Depreciation 122 Working capital adjustments 123 124 125 126 127 Net cash provided (used) by operating activities 128 Increase in accounts receivable D Increase in inventories Increase in accounts payable Increase in accruals 129 Investing Activities 130 Cash used to acquire fixed assets 131 Sale of short-term investments 132 Net cash provided (used) by investing activities 133 134 Financing Activities 135 Increase in notes payable 136 Increase in bonds 137 Payment of common and preferred dividends 138 Net cash provided (used) by financing activities 139 140 Summary 141 Net change in cash and equivalents 142 Cash and securities at beginning of the year 143 Cash and securities at end of the year 144 E F 2019 $255 200 (116) (226) 20 30 $163 ($420) 30 ($390) $122 170 (67) $225 ($2) 102 $100 B A C 26 MicroDrive Inc. December 31 Balance Sheets 27 (Millions of Dollars) 28 Assets 29 Cash and equivalents 30 Short-term investments 31 Accounts receivable 32 Inventories 33 34 Net property, plant, and equipment (PP&E) 35 Total assets Total current assets 36 37 Liabilities and Equity 38 Accounts payable 39 Notes payable 40 Accruals 41 42 Long-term bonds 43 Total liabilities 44 Preferred stock (1,000,000 shares) 45 Common stock (60,000,000 shares) 46 Retained earnings 47 Total common equity 48 Total liabilities and equity 49 Total current liabilities F 2019 $100 10 500 1,000 $1,610 2,000 $3,610 $200 150 400 $750 520 $1,270 100 500 1,740 $2,240 $3,610 G 2018 $102 40 384 774 $1,300 1,780 $3,080 $180 28 370 $578 350 $928 100 500 1,552 $2,052 $3,080 A B 56 57 Net sales 58 Costs of goods sold except depreciation 59 Depreciation and amortization" 60 Other operating expenses 61 Earnings before interest and taxes (EBIT) 62 Less interest 63 64 Taxes 65 66 Preferred dividends 67 Net Income available to common stockholders 68 Pre-tax earnings D Net Income before preferred dividends 69 Additional Information 70 Common dividends 71 Addition to retained earnings 72 Number of common shares 73 Stock price per share 74 75 Per Share Data 76 Earnings per share, EPS 77 Dividends per share, DPS 78 Book value per share, BVPSd E F 2019 $5,000 3,900 200 500 $400 60 $340 85 $255 7 $248 $60.0 $188.0 60 $31.00 $4.13 $1.00 $37.33 G 2018 $4,800 3,710 180 470 $440 40 $400 100 $300 7 $293 $59.4 $233.6 60 $45.00 $4.88 $0.99 $34.20 A B 118 Operating Activities 119 Net Income before preferred dividends 120 Noncash adjustments 121 C Depreciation 122 Working capital adjustments 123 124 125 126 127 Net cash provided (used) by operating activities 128 Increase in accounts receivable D Increase in inventories Increase in accounts payable Increase in accruals 129 Investing Activities 130 Cash used to acquire fixed assets 131 Sale of short-term investments 132 Net cash provided (used) by investing activities 133 134 Financing Activities 135 Increase in notes payable 136 Increase in bonds 137 Payment of common and preferred dividends 138 Net cash provided (used) by financing activities 139 140 Summary 141 Net change in cash and equivalents 142 Cash and securities at beginning of the year 143 Cash and securities at end of the year 144 E F 2019 $255 200 (116) (226) 20 30 $163 ($420) 30 ($390) $122 170 (67) $225 ($2) 102 $100
